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The Effects of Regulation on Stochastic Systematic Risk

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  • Riddick, Leigh A

Abstract

There is recent evidence that systematic risk measures for most firms are stochastic, and that non-stationarity in systematic risk characteristics for regulated firms is related to the presence of regulation. Prior empirical evidence, which suggests that regulation reduces risk, did not incorporate the stochastic nature of the risk/return relationship. There are also problems with the modeling of regulation in this earlier work, and there is evidence that regulated firms may have recently grown riskier. These issues are addressed here by examining a stochastic model that structurally incorporates regulation. Differences in the risk structure of regulated and unregulated firms are identified. Analytic results, simulation results, and actual empirical estimates provide evidence that regulation reduces, but does not eliminate, stochastic systematic risk. The actual empirical results suggest that regulators do reduce stochastic systematic risk, which should lead to lower required rates of return for utilities. Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • Riddick, Leigh A, 1992. "The Effects of Regulation on Stochastic Systematic Risk," Journal of Regulatory Economics, Springer, vol. 4(2), pages 139-157, June.
    • Handle: RePEc:kap:regeco:v:4:y:1992:i:2:p:139-57
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    Cited by:

    1. Buckland, Roger & Fraser, Patricia, 2002. "The scale and patterns of abnormal returns to equity investment in UK electricity distribution," Global Finance Journal, Elsevier, vol. 13(1), pages 39-62.
    2. Roger Buckland & Julian Williams & Janice Beecher, 2015. "Risk and regulation in water utilities: a cross-country comparison of evidence from the CAPM," Journal of Regulatory Economics, Springer, vol. 47(2), pages 117-145, April.
    3. Hooy Chee-Wooi & Robert D. Brooks, 2015. "The Components of Systematic Risk and Their Determinants in The Malaysian Equity Market," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 11(2), pages 151-176.

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